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Ninth Circuit:
Party Gaining Enforcement of Indemnity Duty May Not Recover Attorney Fees for Breach
Panel Declines to Follow Ninth Circuit Case Allowing Such Awards Due to Subsequent California Court of Appeal Decisions
By Kimber Cooley, Staff Writer
The Ninth U.S. Circuit Court of Appeals held Friday that a party prevailing in an action to enforce an indemnity agreement is not entitled, under California law, to an award of attorney fees, finding that the circuit’s contrary view expressed in a 1983 opinion has been rendered obsolete by virtue of a rejection of it by state courts of appeal.
The dispute arose after District Court Judge Dale A. Drozd of the Eastern District of California determined that Comerica Bank breached an agreement to indemnify AGK Sierra de Montserrat, L.P. against claims by a third party in two lawsuits, awarding attorney fees to AGK relating to those underlying actions.
Drozd also awarded $1,146,337.24 plus prejudgment interest for costs and fees incurred by AGK in litigating the breach of contract action against the bank. Comerica only challenges the order for attorney fees incurred in prosecuting the breach contract case.
Agreeing with Comerica, the panel declined to follow the 1983 Ninth Circuit decision in Dewitt v. Western Pacific Railroad Co. There it was held that “costs and attorney’s fees for prosecuting an indemnification claim may be included in the indemnification award” under California law.
The panel concluded that the 40-year-old Dewitt decision is not binding as subsequent state Court of Appeal decisions uniformly hold that indemnity provisions do not cover the costs of litigation to enforce them.
Circuit Judge Lawrence VanDyke wrote the opinion reversing the order by Drozd awarding such fees and remanded for a determination of whether attorney fees might be recoverable under any other theories.
Circuit Judges Eric D. Miller and Bridget S. Bade joined in the opinion. Miller wrote separately to “explain why it is appropriate that we apply a more flexible standard of intra-circuit stare decisis to questions of state law than to questions of federal law.”
VanDyke pointed out that a threshold issue is the degree to which the court is bound by its own circuit precedent and explained that a panel is bound to apply precedent if the case interprets federal law. As to precedent which interprets state law, he said that a different standard applies.
He noted that, in the absence of a pronouncement by the California Supreme Court, federal courts must follow the decision of the intermediate appellate courts of the state unless there is convincing evidence that the high court would decide differently.
Turning to the Dewitt decision, he wrote:
“The two California cases DeWitt relied on…contained essentially no reasoning, and no subsequent California cases have followed them. Instead, there have been a half-dozen California cases that have gone the other way, explaining in some detail their reasons for doing so and, in some of the cases, explaining why DeWitt or the two cases it relied on are wrong.”
He continued, saying California cases since Dewitt “reveal…that such provisions are presumptively about covering costs incurred between one party to the contract and a third party, not about costs incurred between the two parties to the contract containing the indemnity clause.”
The jurist pointed to the 2023 Ninth Circuit decision in Epic Games, Inc. v. Apple, Inc. as supporting this conclusion. In an opinion by Circuit Judge Milan D. Smith, the court in Epic Games acknowledged that “California courts presume” that an indemnity clause “relates to third party claims, not attorney fees incurred in a breach of contract action between the parties to the indemnity agreement itself.”
VanDyke concluded that “[w]e read Epic Games as indirectly acknowledging that the DeWitt rule is inconsistent with California law.”
Undermined by Implications
The judge looked to other law governing attorney fees in California and said “DeWitt’s holding is undermined by its implications for California Civil Code section 1717.” That section provides:
“In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”
VanDyke looked at the interplay between the section and the Dewitt holding and opined:
“This has obvious implications for the DeWitt rule. If DeWitt is correct that an indemnity provision provides attorney fees for first-party disputes over the indemnity clause, then many such indemnity provisions would automatically be converted into broad, reciprocal attorney fees provisions applying to the entire contract by operation of section 1717. In decisions issued after DeWitt, several California appellate courts have noted this exact problem.”
He continued by saying that “reading an indemnity provision to include first-party litigation costs” would defeat the purpose of an indemnity agreement which is intended to be unilateral and said “the way section 1717 would interact with third-party indemnity provisions if they were interpreted to include first-party attorney fees also cautions against DeWitt’s interpretation of California law.”
California Presumption
VanDyke declared:
“[C]ases since DeWitt clearly evince a presumption against reading first-party attorney fees into indemnity clauses, and that presumption reconciles the general purpose of indemnity clauses with section 1717. Therefore,…we conclude the California Supreme Court would not agree with DeWitt….Instead, it would likely apply a presumption that indemnity provisions only apply to third-party losses.”
He added:
“Only much more specific language that clearly evinces a desire to include first-party litigation costs is sufficient to overcome California’s presumption. For example, provisions that might defeat the presumption include those covering ‘attorney’s fees incurred in enforcing the indemnity agreement,’ ‘all losses whether or not arising out of third party Claims,’ or losses from an ‘action or suit by or in the right of the corporation to procure a judgment in its favor.’ ”
Looking to the language in the indemnity provision in the present case, he wrote:
“Here, Comerica agreed to indemnify AGK against ‘any and all loss…asserted by any party arising out of the undersigned’s position as ‘Declarant’….This provision contains exactly the type of broad language that is presumed to only apply to third-party costs and fees, and it contains none of the specific language that would indicate an agreement to include first-party litigation costs. We therefore reverse the district court’s award of first-party attorney fees pursuant to the indemnity provision.”
Miller’s Concurrence
Miller said in a concurring opinion:
“In resolving state law issues, we cannot achieve predictability and uniformity on our own because we are not the only forum in which parties can litigate those issues. If we were to persist in an approach that intermediate state appellate courts have rejected…we would create opportunities for forum shopping and leave parties uncertain about what law will govern their primary conduct.”
He continued:
“Of course, we should not lightly depart from circuit precedent, even on issues of state law. But it is appropriate for us to do so when decisions of intermediate state appellate courts have shown that we are wrong.”
The case is AGK Sierra de Montserrat, L.P. v. Comerica Bank, 23-15290.
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